The U.S. Senate reintroduced a bill earlier this month which, if passed, would make it illegal for pharmaceutical companies to enter into manufacturing agreements with generic drug makers that result in delaying the entrance of generic drug products into the market.

Senate Bill 214, known as the “Preserve Access to Affordable Generics Act,” was put forward by Senator Amy Klobuchar (D-MN), the new chair of the Senate Judiciary Committee’s antitrust panel, and Senator Chuck Grassley (R-IA). Tweet the bill:Tweet

The bill would allow the FDA to initiate legal proceedings against any party involved in a patent settlement of a drug product. The settlements would be presumed anti-competitive and unlawful unless the parties can prove otherwise. The Senate introduced a similar bill in 2010, but it failed to garner necessary support.

The impetus for congressional legislation is due, in part, to adversity the government has faced in challenging pay-for-delay settlements in federal court.

“PAY FOR DELAY”

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These agreements, sometimes referred to as “pay-for-delay” deals, are the result of brand-name drug companies settling patent litigations with generic brand competitors.

As part of the settlement terms, drug companies allow generic drug manufacturers to replicate its exact medications and include inactive ingredients. In exchange, generic drug companies agree to a certain amount of time delay before selling its products.

Generally speaking, before a generic drug manufacturer can introduce a generic formulation of a brand-name pharmaceutical product to the market, they must engage in a lengthy and costly legal proceeding against the brand-name drug manufacturer. This is pursued in order to invalidate the patent underlying the drug formulation, or prove that the generic product does not infringe that patent.

In recent years, however, almost all of these cases have been settled out of court by the generic and brand-name manufacturers, likely to avoid expensive litigation and discovery costs. These settlement terms often involve a license grant from the brand-name drug company to the generic company that allows the latter to exploit the underlying patent prior to the expiration of that patent.

Generic drug companies then begin selling the product using the exact formulation of the brand-name drug. In exchange for the license, the generic manufacturer would agree to drop the lawsuit and delay the introduction of the drug for a period of time.

FTC says Settlement Agreements Violate Sherman Act

The Federal Trade Commission (FTC) has vocally opposed these types of agreements and has challenged the legality of these agreements from its onset. The FTC views this type of agreement as anti-competitive and a violation of federal antitrust law — specifically the Sherman Antitrust Act. Tweet at @FTC:Tweet

The commission contends that generic drug manufacturers constitute competitors of brand-name drug manufacturers, and the agreements essentially constitute paying off a competitor to stay out of the market for a certain amount of time.

According to the FTC’s latest staff report regarding the issue, in Fiscal Year 2012, there were 40 agreements made between name-brand and generic drug companies; a significant increase from the 28 deals made in the previous fiscal year. The deals involve a total of 31 different products whose sales totaled $8.1 billion in 2012.

Settlement Agreements Generally Held Enforceable

The FTC’s allegations have not been met with much support in federal courtrooms, however. Since 2003, only two circuit courts have held these agreements as unlawful, while four have upheld them as legal.

In 2008, the Federal Circuit affirmed the legality of the settlement agreements between Bayer and Barr Labs. The court’s holding was predicated on the theory that patent holders are entitled to prevent infringers from profiting off the patented invention, even if there is an effect on competition.

Additionally, the court declined to find the settlement agreements to be per se unlawful under the Sherman Act. The decision was based on its findings that any adverse anti-competitive effects were within the scope of the patent, which creates “an exception to the general rule against monopolies and to the right of access to a free and open market.”

The FTC has found some support in the Third Circuit when they initiated a suit against Merck & Co. last year. In that situation, the court held that the settlement agreements were unlawful because they did not resolve the underlying issues of whether there was a valid patent in place and if there was a valid patent, whether the generic competitor infringed that patent.

The fate of these patent settlement agreements could soon be resolved by the Supreme Court. Due to the split among courts regarding the legality of the agreements, the court has agreed to hear an appeal by the FTC in March in the matter of Federal Trade Commission v. Watson Pharmaceuticals, Inc. Tweet it:Tweet

In the Watson Pharmaceuticals case, the FTC accuses various generic drug manufacturers of accepting payments from Solvay Pharmaceuticals Inc. in exchange for agreements to delay patent challenges until 2015.

Drug Cos. Say New Law Would Limit Rights of Manufacturers, Patent Holders

The Generic Pharmaceutical Association (GPhA) has released a statement charging the FTC with being “wrong on the facts, wrong on the public policy, and wrong on the law.” The GPhA’s Chief Executive, Ralph G. Neas, has pressed for meetings with the two lawmakers who introduced Senate Bill 214 and claims the bill will once again not achieve the necessary legislative support to become law. Share the news:Tweet

According to GPhA spokesman Greg Howard, legislation of this sort is bad public policy and will have a chilling effect on patent challenges:

“The more you limit the options that companies have, the more likely they’ll say: we just won’t bother trying to challenge the patents.”

The GPhA asserts that the settlement agreements actually help consumers because they often allow generic drugs to hit the market sooner and at lower prices, due to saved litigation costs.

The Eleventh Circuit concurred with the GPhA’s argument in a case brought by the FTC in 2005. The court focused on the general policy of law which favors settlements of litigations:

“There is no question that settlements provide a number of private and social benefits as opposed to the inveterate and costly effects of litigation.”

Despite the fact that the Supreme Court has agreed to rule on the issue, legislators and the FTC continue to push the bill to put an end to patent settlements, allegedly in the pursuit of protecting consumers.

However, resolving private settlement issues with legislation that strictly limits the rights of drug manufacturers could create more problems than it eliminates. Patent owners should not be deprived of the right to use their patent rights as they see fit, including to negotiate and settle lawsuits.

Moreover, given the fact-specific nature of these settlements, binding them all under one rule is counterproductive. The FTC might have to come to terms with the fact that interpreting the law should be left to the courts.

About the Author

Armig Khodanian

As a legal intern at IVN, Armig assists with the network's legal issues and writes in the area of Law and Politics. She has a B.A. in Political Science from the University of California, Los Angeles and is currently in her second year of law school at the University of San Diego School of Law.